Organizational Design and Technology Choice with Nonbinding Contracts
AbstractWe present a new methodology for studying the problem of labor contracting within a firm's boundaries where contracts provide only a minimal commitment to wages and employment. Given the peculiar contractual incompleteness of labor contracts, the resulting wages and profits under an interesting class of complete information bargaining games distort the technological and organizational decisions facing the owner of the firm's capital. We show that in such settings where labor contracts are nonbinding, these decisions are distorted in an economically distinct way compared to the standard neoclassical firm. Among other things, we demonstrate that a firm with a nonbinding contractual basis will, relative to a neoclassical firm, (i) overemploy labor, (ii) underemploy capital, (iii) choose inefficient ``frontloaded'' technologies, (iv) de-emphasize scale and scope economies, and (v) inefficiently allocate labor across productive assets. We apply our analysis to product market competition, unionization, hierarchical management, and horizontal mergers.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Game Theory and Information with number 9310001.
Length: 34 pages
Date of creation: 12 Oct 1993
Date of revision: 13 Oct 1993
Note: 34 pages, uuencoded postscript file
Contact details of provider:
Web page: http://126.96.36.199
Find related papers by JEL classification:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- Edlin, Aaron S & Reichelstein, Stefan, 1996.
"Holdups, Standard Breach Remedies, and Optimal Investment,"
American Economic Review,
American Economic Association, vol. 86(3), pages 478-501, June.
- Aaron S. Edlin & Stefan Reichelstein, 1997. "Holdups, Standard Breach Remedies, and Optimal Investment," NBER Working Papers 5007, National Bureau of Economic Research, Inc.
- Jackson, Matthew O. & Wolinsky, Asher, 1996.
"A Strategic Model of Social and Economic Networks,"
Journal of Economic Theory,
Elsevier, vol. 71(1), pages 44-74, October.
- Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Matthew O. Jackson & Asher Wolinsky, 1994. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.